Lithia Motors Inc (LAD) 2014 Q1 法說會逐字稿

Greetings and welcome to the Lithia Motors, first quarter 2014 earnings conference call. (Operator Instructions). I would like to turn the conference over to Mr. John North, VP of Finance. Thank you, Mr. North, you may begin.

Thank you, and good morning. Welcome to Lithia Motors first quarter 2014 earnings conference call. Before we begin, the Company wants you to know this conference call includes forward looking statements. Forward looking statements are not guarantees of future performance and our actual results of operations, financial conditions and liquidity, and development of the industry in which we operate, may differ materially from those made in, or suggested by the forward looking statements in this conference call. We urge you to carefully consider this information and not place undo reliance on forward looking statements.

We undertake no duty to update forward-looking statements including our earnings outlook which are made as of the date of this release. During this call we may discuss certain non-GAAP items such as adjusted net income and diluted earnings per share from continued operations, adjusted SG&A as a percentage of revenues and gross profit, and adjusted pre-tax margin.

Non-GAAP measures do not have definitions under GAAP and may be defined differently and not comparable to similarly titled measures used by other companies. We caution you not to place undo reliance on non-GAAP measures, but also to consider them with the most directly comparable GAAP measures.

We believe the non-GAAP financial measures we present improve the transparency of our disclosures and provide a meaningful presentation from core business operations because they exclude items not related to core business operations, and improve the period comparability of our results from core business operations. These presentations should not be considered alternative to GAAP measures before reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com highlighting our first quarter results

On the call are Bryan DeBoer, the President and CEO, Chris Holzshu, SVP and CFO, and Sid DeBoer, Executive Chairman. At the end of our prepared remarks we will open the call to questions. I am also available in my office after the call for any follow-up you may have. With that, I will turn the call over to Bryan.

Good morning and thank you for joining us. Today we reported first quarter adjusted net income from continuing operations of $27.1 million compared to $21.9 million a year ago. We earned $1.03 per share in the first quarter compared to $0.84 last year, or an increase of 23%.

Our revenue exceeded $1.1 billion in the first quarter, a 19% increase over the prior year. From this point forward all comparisons will be on a same store basis. In the quarter, total sales were up 12% reflecting increases in all four business lines. March was a solid month for national new car sales with a SAR of $16.3 million which is the highest since November of 2007.

March was also the best month in our Company's history in units, revenue and pre tax profit which was encouraging after a somewhat tepid start to the year. In the quarter, in new vehicle revenue increased 10%. Our new vehicle unit sales increased 8% which was above the national average of 1%. Domestic unit sales increased 9% compared to 1% nationally.

Import unit sales were up 8% compared to 2% nationally, and luxury unit sales were up 7% compared to 3% nationally. Retail used vehicle revenue increased 19% on the quarter. We retailed 12% more used units over the prior year resulting in a used to new ratio of just less than one to one.

We sold a monthly average of 55 used vehicles per store, up from 50 units in the first quarter of 2013. We continue to target selling an average of 75 used vehicles per store. Our performance improved in all three used vehicle categories in the first quarter. On a unit basis certified pre-owned were 28%.

Core product or vehicles three to seven years old increased 8%, and finally value autos, or vehicles over 80,000 miles increased 9%. Our (inaudible) per vehicle was $1,200 per unit compared to $1,116 last year, or an increase of $84 per unit. Of the vehicles we sold in the quarter we arranged financing on 72%, sold a service contract on 44% and sold a lifetime oil product on 38%.

Our penetration rates and service contracts and lifetime oil sales increased 300 and 240 basis points respectively. Our service body and parts revenue increased 9.4% over the first quarter of 2013. This was on top of last year's 7% increase over the first quarter of 2012.

Customer pay work increased 8% which is the 19th consecutive quarter of improvement. Warranty sales increased 7% which is the 6th consecutive quarter of improvement. Wholesale parts increased 8%, and body shop increased 7%.

Gross profit per new vehicle retail was $2,301 compared to $2,354 in the first quarter of 2015, or a decrease of $53 per unit. Gross profit per used vehicle retail was $2,544 compared to $2,560 in the first quarter of 2013, a decrease of $16 per unit.

In the first quarter the blended overall gross profit per unit was $3,662 compared to $3,605, or an increase of $57. As we have previously discussed our store personnel monitor overall gross profit to retail vehicle sales to evaluate their performance. While there has been a shift in the allocation of gross profit by business line within the vehicle sales, the overall result is higher.

Our total gross margin was 16%, down slightly compared to 16.2% in the same period last year. Increases in vehicle sales continue to out pace our growth in service body and parts and this mix shift explains the decline in overall margin.

As of March 31st , new vehicle inventories were at 731 million, or a day supply of 69 days, a decrease of two days from a year ago. Used vehicle inventories were at 171 million, or a day supply of 46 days. This is the same as our day supply level a year ago.

As I mentioned on our fourth quarter earnings call in February, the acquisition market remains very active. We continue to seek exclusive domestic and import franchises in midsized real markets and exclusive luxury franchises and metropolitan markets.

During the first quarter we purchased three stores in Hawaii, Island Honda on Maui, and Honolulu Buick GMC Cadillac, and Honolulu Volkswagen on Oahu. We also increased our presence in the central valley of California with the purchase of a Volkswagen store in Stockton. Earlier this month we acquired Access Ford in Corpus Christi, Texas and opened Lithia Chrysler Jeep Dodge Ram in Alaska. Since October 2013, we have purchased eight stores and opened one location with combined total annual revenues of $380 million which is nearly 10% of our 2013 full year revenues. With that I will turn the call over to Chris, our CFO.

Thank you, Bryan. As we previously discussed, we grew overall same store sales 12% in the quarter. We continue to focus on increasing overall gross profit in order to leverage our cost structure. As a result our first quarter adjusted SG&A and a percentage of gross profit dropped 60 basis points to 68.5%.

This improvement was primarily related to a reduction in advertising expense, 50 basis points and rent of 40 basis points. Throughput, or the percentage of each additional gross profit dollar over the prior year we retain after selling costs and adjusted to reflect same store comparisons, was 41%. This result was shy of our target of around 50% and is primarily due to certain periodic adjustments to SG&A required under GAAP.

As our gross profit percentage growth decelerates relative to levels in prior years, throughput becomes more volatile. For example, a variance of $160,000 in SG&A expense would change our throughput by 1%. At the end of the quarter we had $22 million in cash and $133 million available on our credit facility.

Currently $193 million of our operating real estate is unfinanced. These assets could provide up to an additional $145 million of available liquidity in 60 to 90 days. This brings our total liquidity to $300 million and we remain comfortable with our overall level of available credit.

At March 31st, excluding floor plan financing, we had $277 million in debt of which $163 million is mortgage financing. We have no mortgages maturing until 2016. We have no high yield bonds or convertible notes outstanding. We are in compliance with all of our did debt covenants at the end of the quarter.

Using our 2014 guidance we estimate our leverage ratio is approximately 1.2 times , excluding floor plan debt. Our free cash flow as outlined in our investor presentation was $32 million for the first quarter of 2014.

Capital expenditures, which reduced the free cash flow figure, was $13 million for the quarter. We estimate our 201 power CapEx will be $92 million. This updated budget is based on $17 million in lease buy outs, $24 million in newer remodeled facilities as a result of prior acquisition, $8 million for open points granted by the manufacturer, and $43 million related to facility improvements and other business development opportunities.

Based on this CapEx estimate and the full year guide guidance our free cash flow is estimated to be $75 million. Our capital strategy is to maintain a balanced approach to acquisition, internal investment, dividends, and share repurchases.

Our first choice for capital deployment remains to grow through acquisitions and internal investments. Given the recent up tick in acquisition activity we are increasing the deployment of free cash flow the company generates.

The 9th store, as Bryan mentioned, required investment of $43 million still well below the full year free cash flow of $75 million I discussed a moment ago. Given both our ability to generate free cash flow as well as our sector low leverage ratio we believe we have the ability to acquire significant revenues in the future. However, we will continue to maintain our strict ROE thresholds required before we commit to deploy additional capital.

We have been closely monitoring the availability of credit within our customer base as we believe it is one of the main drivers of continued recovery and SAR. Of the vehicles we financed in the first quarter, 14% were to sub prime customers, an increase of 170 basis points over the first quarter of 2013. Despite this improvement, this is still well below the national average penetrations for sub prime at 20%.

More importantly, the percentage of customers able to obtain financing increased 300 basis points from the first quarter of last year to over 18% of the customers who completed a credit application. In essence, both the percentage of sub prime to total customers and the number of sub prime customers securing lending approval increased.

We continue to carefully monitor registration levels in our markets to gauge our progress in the economic recovery while overall our markets remain 5% below registration levels in 2006, and our western markets registration levels remain 11% below 2006 through December of 2013,the most recent data available. We believe this indicates market expansion that will come to fruition over the next few years as credit availability returns and unemployment levels decrease.

We have updated our guidance for 2014 and project earnings of $1.18 to $1.20 per share for the second quarter of 2014 and $4.57 to $4.65 per share for the full year 2014. For additional assumptions related to our earnings guidance I would refer to you to today's press release at Lithiainvestorrelations.com.

Our board of directors has also approved an increase in our quarterly dividends to $0.16 cents per share. This concludes our prepared remarks and we would like to open the call to questions. Operator?

We will now begin conducting a question-and-answer session. (Operator Instructions). Our first question is from Steve Dyer, from Craig-Hallum. Please go ahead.

Hi. Congratulations on another good quarter.

Thanks, Steve.

Several questions. I guess I will be the first to ask . It is a GM challenging from a publicity standpoint in Q1, wondering a two-prong question. One, have you seen any impact on their share or demand, or commentary worry about their product on the new side, and then secondarily, what have you seen to date. Any trends on the parts and service side? It sounds like that will be a pretty lengthy process in terms of getting all of those parts to dealers. Any commentary on either side of that?

Steve, this is Bryan. Thanks for joining us today. On the new vehicle side , traffic in our stores hasn't been impacted dramatically. In fact, in the month of March we were up 14.2% in general motors. As a company we were up 12.3, so they responded about the same as the rest of the market. They did have an EP pricing in that month which helped generate additional sales I would imagine.

We believe it has generated some discussions and hopefully can generate some additional activities. What is happening on the service side is a lot of customers are calling in. There is concern about what is going with the ignition switches and other recalls. I think we are looking at I think is a September date, October date, to be able to fix most of those. They have given us enough parts that have the looseness in the ignition switches and we seem to be working through those.

The thing to remember though, these are customers that we haven't had the opportunity to see in possibly five to seven years. They are outside their warranty period. This is a time to put our best foot forward and to show them we have value pricing and we are selling multiple different commodities that they can come and buy from us. We can do it in a quick period of time. So for us, we believe it is fairly opportunistic on definitely the service side and hopefully they will get past the issues on the sales side of things.

Steve, this is Sid. GM has a special rebate for those people too, another $500.

Certainly the value is getting those people back in. I'm wondering if you have seen enough of them yet to know if that is translating to other customer pay work and to what magnitude.

I think our initial signs are pretty good on the service end of things.

Got it. On the acquisition front, obviously very active in the first quarter. Is the thought process for the year generally that you got a lot of them out of the way early, or are you just running into some opportunistic things and we may continue to see activity throughout the year?

This is Bryan again. I would say this, we were fortunate to have a pretty good run here over the last four or five months, but the pipeline is remaining as full as it has been. I don't think there is an intent to do them at the start of the year, and then not do many in the second half of the year. We believe that there is a ripe opportunity to be able to continue with acquisitions. I really believe our organization capital wise and people wise are ready for the challenge on increased growth. As long as the pricing remains at levels that meet our ROE thresholds, we plan on continuing to grow.

That was my next question. It is interesting and you hear a lot of commentary about evaluations in the industry. I'm noticing the multiples you are paying this year and are actually in line to a touch below what you were paying last year. What do you attribute that to?

I think a lot of it is related to our acquisition strategy being small to midsized markets so they are not as competitive. What we have definitely recognized is that the last couple years there is a pent up supply of acquisitions that are not really selling in those size markets and then we are able to stay in relationship with those sellers and hopefully walk them to pricing that meets those ROE thresholds. And I think that discipline of not jumping in too early and understanding what is happening in the market place helps us to maintain pricing at the levels that are more traditional.

Last question, and then I will hop back into the queue. Commentary in the industry, competitors, et cetera seems to indicate that the momentum from the end of March is continuing thus far in April. I'm assuming you are seeing something similar?

Steve, this is Bryan. What we are seeing in April is an on target type of market. March was definitely very robust. It was obviously our best quarter in our history in many different areas. I think we expect as reach more normality, we should see increases. In terms of April, it looks pretty normal.

Steve, this is Chris. Obviously we get as much information as possible before we put our final guidance out for the quarter and for the full year, and we did contemplate the way things are happening in April and in our full year guidance.

Got it. Thanks, guys.

Thanks, Steve.

Thank you. The next question is from Gary Balter, from Credit Suisse. Please, go ahead.

First of all, congratulations on another very strong quarter.

Thanks, Gary.

Bryan, or maybe Chris may have mentioned this. The SG&A, you mentioned you are 41% gross profit throughput and you said some SG&A required under GAAP that caused that to be a little different. What is that? Internationally are you closer to the 50 that you would like to be at?

Yeah, Gary, this is Chris. Our target will continue to be around the 50% range. When you start to see our gross profit moderate because our sales rates are not as high , the small fluctuations we have with you with accounting adjustments were related to vacation accruals and some insurance adjustments that we made. They are going to have a bigger impact because the gross margin changing is not as much. Our focus will switch and at 68.5% any throughput above 33% will continue to bring that number down. So that will continue to be our focus and we feel optimistic we will get leverage out of the model.

And then just following up on the parts and service . You had a great warranty number. We have modeled out and you tell us if we are on the right path, but given how young especially your car sales because you are a little behind the sector, that number it looks like it should continue to be pretty strong going forward. Is that a fair way to think about it?

Gary, this is Bryan. I think that is fair. If you look at that three to five-year bubble of cars that are now coming into the end of their warranty periods, people have tendencies to come in a little more. That 17% that we saw this quarter , if you extrapolate what is happening with UIO, we don't see any big reasons to be concerned about weakness in that area and similar patterns should continue.

Is there worry on the other side with the parts and service given that now you are anniversary the 09-2010 weakness? I'm sorry with the customer pay parts and service?

No , I don't think we expect any weakness there. Customer pay somehow continues to increase. I think it speaks to this ability to be able to be many things to many people and be more pro active to customer needs when it comes to values and time. We repeat that time and time again. It is really as simple as that. If we can continue to meet our customers' needs, we know the base of business is bigger than it used to be. We should be able to continue in that arena as well.

Thank you.

We will lists out of the warranty recalls too I'm quite sure, particularly in General Motors.

Right. Yes. That doesn't hurt. Thank you very much.

Thanks, Gary.

Thanks, Gary.

Thank you. The next question is from Rick Nelson, of Stephens. Please, go ahead.

Thanks, good morning. Bryan you have been looking at eastern markets now in terms of acquisition opportunities for a bit now. I'm wondering if the pipeline includes anything out there and does the pipeline also include premium luxury which you are under weighted today relative to some of your peers?

Yeah, I think what are we around 9% in luxury which is a little bit higher, a couple percentage points higher than national average, but in relation to our peer group we are a little lighter. There is not a specific focus to grow in luxury, however obviously we target many stores in that arena. Now, if we are looking at the eastern market, I think we always balance things to look at what our time commitments are and what our ROE thresholds are and if there is not vast differences our prerogative would be to fill in the areas that we already have management staff and we don't have to spread our wings quite as far. We don't have anything active really in the east at the current time. However, we still believe that there is going to be an opportunity to be able to buy a group that comes with some people. I think that's how we have been discussing it the last few years. We have to find a group that is much like we were that has the ability to grow people and really needs the capital injection to be able to expand their footprint. So far it hasn't quite come to be. But we are still actively looking and I think we will still be able to find something in the future. In the interim if things come up in the west, it probably means the ROE rates were much higher than what we are still seeing in the eastern markets.

Thank you for that color. The $75 million in free cash flow and you have opportunities to put on some leverage over and above that. How much revenue do you think that would support in terms of acquisition and how much do you think the organization could absorb in any 12-month time frame?

Rick, this is Chris. I will take the first part of the question. As Bryan stated in his prepared remarks, we used $43 million in equity to purchase about $380 million in revenue which is consistent with what we have seen in the last three to four years. 10% to 15% of revenue is the equity infusion. $75 million in free cash flow that includes a lot of the CapEx from the prior acquisitions is included in that number. We feel we can pick up between $700 and a billion in revenue a year off our current cash flow that we have. Additionally, at $300 million you can obviously buy in the $1.5 billion to $3 billion in revenue if you were to lever up. With those numbers you start to look at one to 1.5 times the additional terms.

Right and just finally if I could ask, a couple of your peers are opening free standing used car stores. I know you launched a concept and the recession came. Are you giving any thought to restarting a project like that?

Rick, this is Bryan again. I really believe in our size markets we have so much space capacity on our existing lots. And they sit in prime locations. Our issue is more about procurement. It is not about space or exposure to the consumer. We believe if we can find more used cars we will put them on our existing lots with no additional capital expense. So in terms of Lithia's opportunity to grow used cars, we believe that is in our existing footprint of stores and obviously primarily based off the ability to find those cars , and as supply increases on those lower star rate years, and that's why we are starting to see these increases in certified at a higher rate than core and value auto. We are having years come back that are more normal years at 14 million , 15 million that are now used cars. As those push into core product of three to eight-year-old vehicles we have more supply of those cars which are the cars that generate the profit and the trade ins of value vehicles. We are pretty excited about that and we don't think we need to change our existing new car footprint. We can offer those opportunities to our customers where we currently are.

Rick, this is Sid. If you do the math, if we had a hundred stores is what we have and every store did 20 more used cars that's 2,000 a month more salestimes $18,000 which is a lot of growth.

We currently are doing 65 per site and we set that target to 75 which is a sizable growth for the next couple years to be able to not have capital expenditure to do that.

I think we learned our lesson on stand alone for now.

Thanks for that clarity. Good luck.

Thanks, Rick.

Thank you. The next question is from John Murphy, from BofA Merrill Lynch. Please, go ahead.

Good morning, guys. Just a first question as we look at the strength in same store sales , just curious how you guys feel like you are executing in the stores, and if there is need to potentially add back some variable costs. Just trying to understand how much more room you have to flex up in your facilities before a lot of costs seeps back in?

John this is Bryan. I would say this, we have this general concept of managing by thirds. This concept of high performing stores and performing stores and opportunistic stores, even in the recession it was still a third of our stores. We still have a third of our stores that we believe perform at considerably less than their potential. When we talk about potential it is typically about top line growth and market share and the ability to grow your customer base. It is where most of the opportunities come from, and in such that third of stores or 25, 30, 40 stores will gain throughput by increasing their gross profit within that store. We also believe that as we penetrate the market deeper , as a larger organization that can gain economies to scale that even our performing store and high performing stores have the ability to find some synergy's. And this is why when we talk about trying to reach that 50% and how do you maintain a 50% through put that we believe there is still potential in the arenas as we find productivity increase and other economies that come to model. We still believe that despite a 68% SG&A in the first quarter which is our best first quarter in our history that there is still dramatic improvement opportunities and not only SG&A, but top line that will come not only from the market place that still is recessed in our western markets, but will come through continued through put increases.

This is Chris. Just to add on to that, in the quarter we saw about 70 basis points in improvement and SG&A that growth as a result of rent and facilities charged the leverage that we have. If you continue to see the growth rates that we had and whether it is one to two years, we feel like we are going to get that again because we don't have an intensive capital deployment need in our current facility.

That's great. Can you talk about the past utilization of your service bays and what level do you think those are at? Are you running two shifts or three shifts or how do you think about the capacity in office space and what is left to go?

We are at about 55% stall utilization based off of our current hours of operation. Without extending our typical 7.00 to 6.00 hours and 80% open on Saturday, there is still 45% more potential upside. If you look at that a in a capacity basis at 55% utilization you can grow like 70% based off of our current hours. Now, fortunately our customers have become accustomed to those hours, but it is not as customer friendly as we should be. We now have stores that are starting to talk about late night hours like 10.00, 11.00 at night we are also looking at Sunday hours when our consumer base is actually not working. And these are things that can even increase capacity beyond that. I think when we look at capital projects in service and parts, it is more about the front end visibility of how do we invite our customers in and help them know we are not just a warranty station. We are a quick lube station and a quick commodity experience and we are value priced and those type of things. In terms of capital expenditure for stalls and to be able to produce work, we believe we have plenty of stalls for our future.

That's very encouraging. And then lastly on the sub prime comments when you mentioned 14% of your sales and national average was 20%, is that inclusive of used vehicles? So it is not just new vehicle sales?

John, this is Chris, that is combined.

And do you have a breakout roughly of what it is in new and used? My understanding is that new was closer to sort of a 7% to 8% range and used was much higher than that in general the national average.

I think your numbers are close. I would have to pull them out to find them. I think it is 60%, 70% of our sub prime customers customers are buying used vehicles and it is 30%, 40% on new. I think your numbers are close.

Cool, thank you very much.

Thanks, John.

Thank you. The next question is from Scott from Sidoti & Company. Please go ahead.

Good morning.

Hi, Scott.

Can you maybe talk about the gross margin on the new car side of the business? We have seen at least in this quarter the rate of decline in that business start to slow down. And can you maybe talk to the discipline of the OEM's and some of the programs out there? Is it that or are there any company specific things you are doing with say the bottom two-thirds of some of your stores and bringing them up to average?

Scott, this is Bryan. I think when we look at gross margin, and I made this comment in the script as well, we look at it as an all inclusive, how much do we make per deal. Margin is less in point. We try to train our people to understand the water fall effect of selling that new vehicle. So to us it is not as critical. However, your comment on the lower two-thirds, absolutely. If we are trying to gain market share and trying to help people explain that and trying to maintain through put, through put is driven off the top line. It is more crucial to get the volume because that is what is keeping our earnings growing. As we really look at the future, it is probably less important to us whether or not margins are declining even though pricing went up 2%, is that right?

Yeah, price was up 2%.

It was up a couple percent which is going to affect margins. I guess from a ground level execution standpoint the mental mind-set is we need to sell that new car so we can get that first trade and second trade and third trade and then get most of those customers back into our service and parts department over the next three to five years.

And Bryan, I missed the breakout of the used same store sales certified versus core versus the value. Could you give that again?

Sure. Unit growth in certified was up 28%. Primarily a function of those bigger SAR numbers coming through now that are one to two years old. Core product was up 8% in unit. Value auto was up 9%.

And last question on parts and service, looks like the body shop posted a very nice rebound after about three quarters of lower numbers. I think on the last call you had talked about maybe a few locations that were under performing. Can you talk about what drove the nice sequential increase in the first quarter?

You are exactly right, Scott. This is Bryan again. We had three body shops of which two of them we were able to reposition management to be able to get things back on track. A lot of that comes with relationships with insurance companies those type of things that are finally starting to take hold. Believe it or not we don't have any real body shops in those weather impacted states. It wasn't really weather. We believe in this case it was the people we spoke to last quarter.

That's all I have. Thank you.

Thanks, Scott.

Thank you. The next question is from Brett Hoselton of KeyBanc Capital Markets. Please go ahead.

Good morning, gentlemen.

Good morning, Brett.

Hi, Brett.

Looking at used vehicle sales, 19% increase in the first quarter, same store. Your guidance of 9.5%, you bumped that up a bit. Is there some particular reason you are thinking that might slow down? Certified pre-owned seems like for the next two or three years we will see a pretty steady increase of off lease vehicles and that should be a nice tail wind, but what might be some of the head winds you are expecting in the back half of the year?

This is Chris. Good question. What we are really seeing is the volatility in ASP's as we see a shift in the buckets between the certified core and value auto segments and it makes it hard to forecast going forward what ASP's are going to do and what the top line revenue growth will look like. What we focused our energy and time on is looking at the gross profit per unit number which has stayed relatively consistent around the $2500 mark. And then what do we expect units to do in total? If you look we have maintained a pretty consistent forecast in our used vehicle units which should be in the 8% to 10% range. We think that relatively speaking gross profit dollar per unit will stay level.

As we think about the acquisition outlook here can you talk about deal flow? The level of deal flow you are seeing versus three or six months ago and where you are at in terms of evaluations and where your expectations are going forward?

If we look at a comparison to three to six months ago we believe supply of deals out there continues to grow believe it or not. We just went through a pretty good run . There is a lot of deals out there. It is just whether or not they are selling and they don't appear to be selling. I would say this, we don't set quotas on how many we expect to accomplish. We balance our capital structure with our expected ability to buy deals with our dividends rate and what our stock price is on share buy back and then make the decisions. As long as there is opportunity and it is in balance and stride with the development of our internal people that can operate those stores because we do buy average performing stores typically then we are going to move forward on those. It is not a quota-based system. It is more of an ROE threshold hurdle. But, to recap, there is supply out there and we believe our future holds a number of acquisitions just like what we have been running at.

And then switching gears, wanted to just talk about F&I gross profit per unit and you have obviously done a nice job pushing that up. You are maybe still $100-$200 below some of your top performing peers. Can you talk about how your markets may differ versus your peers, and do you think you can get your gross profit per unit up in that $1300, $1400 range off a longer term? Is that even a target?

Brett, this is Chris. I think we are looking at taking each quarter and each year one at a time. Some of the differences we have because of our use to new mix, our new vehicles generate $1,400 in PVR, and used $1,000 in PVR. Part of the difference is due to the value autos we sell. We sell about half of the PVR in F&I than our normal core product and certified product. All in all, we have talked about this now for several quarters. We know it is an opportunity. It is something we are working on. We are starting to see some positive trends improve related to our penetration rates. We are satisfied that at least moving initially up $84 year-over-year is a step in the right direction. We bumped our guidance a little bit for the full year to take that into account. We are going continue to execute and we know there is opportunity there and we will continue to work on it going forward.

Thank you very much, gentlemen.

Thanks, Brett.

Thank you. The next question is from Bret Jordan, from BB&T Capital Markets. Please go ahead.

Good morning. This is actually David Kelly in for Bret this morning. Thanks for taking my questions. Just a couple of quick ones here, mostly follow-ups. Just want to ask you I think you mentioned at the start of the quarter I think you threw out the word tepid for the first month or so. Just wanted to get some additional color on what you were seeing in January, and if that carried over to February with more of a seasonal weather impact we are seeing here or is it just a consumer slow down after a holiday spending? Just wanted to get some additional thoughts on that.

David, this is Bryan. I think if we characterize the quarter , January and February were on target. March was phenomenal. The beat came from March, not from January and February. We weren't impacted by weather very much in January and February. We really had about 12 stores in northern Oregon, central and northern Oregon that were impacted for four or five days that had the biggest impact in February was primarily in service and parts. It hurt us a little bit, and whether we got that back in March, that is productivity losses that are hard to recover, but when it comes to the new vehicle operations and used vehicle operations you get those back, I believe, in the next couple weeks once the snow melted and the ice was gone, and we were good to roll again. That is a synopsis of the quarter.

All right, great, thank you. And then a quick follow-up on I think you mentioned the ASP's on the used side , that can be volatile quarter to quarter. If we get an increase here in certified pre owns, assuming that bumps up the ASP's, is the value auto segment now a big enough piece of the pie here where if values swing high enough year-over-year that is what is going to drop that ASP or has the potential to increase the volatility over the next two to three quarters?

David, this is Bryan. I really believe it is pretty balanced. What we are seeing is there is a pretty substantial difference. We were up 19% in revenue and only and 12% in units, which is 6% or 7% in pricing. When we start to look at value,we are starting to creep in what is considered an as is vehicle which means our guys are able to recondition cars a little more often and they are looking at a little higher priced cars occasionally and I don't know that you can exactly extrapolate there is a correlation between value auto and certified balancing each other out. I would say that as supply increases which we really believe that that supply and that core is starting to creep in now , that should stabilize pricing someto allow us to increase our supplies on the ground which we really believe is the biggest delineator between future growth and achieving that 75 units per site.

All right, great. Thank you for taking my questions.

You bet, David.

Thanks, David.

Thank you. The next question is from Bill Armstrong, of CL King & Associates. Please go ahead.

Good morning, gentlemen. What drove that huge increase in CPO sales ? And is there a material difference in the gross profit per unit between CPO versus the core or the value used vehicles?

Our certified margin is actually lower. It is 9.8% with an average of 13.6%. It is a contrast, the opposite side of the spectrum value auto has a 23% growth margin. We believe the certified was based off increased supply and availability from better SAR years that were 13.5 million 14 million SAR's rather than 10 million and 12 million SAR years.

Well it sounds like that should be pretty sustainable then for awhile.

I think you are right. As those big SAR years start to push into core and four and five years from now they start to push through into value auto it is a real win/win for organizations that have the ability to capture that downstream business.

Right. Okay, great. Thanks a lot.

Thanks, Bill.

Thank you. The next question is from Steve Anderson of Venture Capital Management. Please, go ahead.

Hi, everyone. How are you?

Hi, Steve.

Thank you for another great quarter. A couple Brett's ago asked most of my questions, but when you say you are buying average dealers in that channel, what is a differential from an EBITDA perspective that you expect to achieve a year into these acquisitions ?

Steve, this is Bryan. Let me quickly speak to the potential in an acquisition on an average or under performer we typically look at there is two to three times profit potential in the entirety and that does not come through throughput. It comes through volume increases in used vehicles and new vehicles and then eventually obviously in service and parts. I think we typically state it takes two years to get those acquisitions to equalize state. Chris, do you have any color on throughput or EBITDA in relationship to where their performance is?

Generally speaking what we see on an EBITDA basis is 3%, 3.25% and we are running 5%. On an SG&A to growth basis when we are at 68 we see typical dealers in the high 70s and low 80s. So we run an assessment when we run our pro forma on acquisitions to identify where the opportunity is. It starts with gross and then we work on cost control. The numbers Bryan laid out are in line with what we are seeing.

Chris, sorry, maybe you can clarify one thing for me. How many of your dealerships currently are operating underneath that 68% of throughput?

We don't disclose that specifically. I think what we do is we look to identify the opportunities , and that number is hard to find. If you do it on a rough top basis, you start looking at some of your smaller stores which have really high SG&A to gross, but wouldn't have a big impact if you move them below average. At the same time, the bigger stores are the ones we stay focused on. I would say the best stores we have are operating SG&A in the low 50s and the worst are above 90. One of the data points to consider when you look at what the potential is coming off of March are SG&A growth in March for the month was in the low 60s. Sustainable long-term if we could do a March every month that would be great. We will work on that. I'm sorry?

That would be great for all of us.

Exactly. I think it highlights where the opportunity could be, and we are going to continue to work on bringing our SG&A to gross down.

Great, thanks, guys. I really appreciate it. Talk to you later.

Thanks, Steve.

Thanks, Steve.

Thank you. We have no further questions in the queue at this time. I would like to turn the floor back over to management for closing remarks.

Thanks to everyone for joining us today. We look forward to updating you again in July.

Thank you. Ladies and gentlemen, this does conclude today's tele- conference. You may disconnect your lines at this time and thank you for your participation.